South Korea’s defense companies became major beneficiaries of a global rearmament wave. Now, as their share prices retreat and warfare evolves, investors are weighing a tougher question: Can the country’s established weapons makers adapt to a battlefield increasingly shaped by drones, artificial intelligence and air defense?

Russia’s invasion of Ukraine accelerated military spending across Europe, creating demand for South Korean tanks, artillery and missile systems. Buyers were drawn to the country’s combination of competitive pricing and relatively fast delivery. But the rally has reversed sharply. The combined market value of Hanwha Aerospace, LIG D&A, Hyundai Rotem and Korea Aerospace Industries fell to about 62 trillion won ($46.18 billion) at the end of October, down from a 52-week peak of 170 trillion won, according to South Korean broadcaster SBS.

Follow THE FUTURE on LinkedIn, Facebook, Instagram, X and Telegram

Changing Technology, Changing Procurement

The decline has sharpened scrutiny of whether companies known for conventional platforms are positioned for a more technologically diverse conflict. The war in Ukraine has demonstrated how comparatively inexpensive drones can threaten costly military equipment. Drone attacks from Iran have also depleted stocks of expensive air-defense missiles used by the U.S. and Gulf allies.

“Modern warfare is being fought with less traditional weaponry” than tanks, cannons and armored vehicles, said Peter Kim, senior managing director at KB Securities. He noted that China’s dominance in drones has made it difficult for potential competitors in Europe, the U.S. and Asia to compete on price.

KJ Hwang, a Korea autos and industrials analyst at Bank of America, said procurement priorities are shifting toward drones, counter-drone systems and air defense. The implication for investors is not necessarily that conventional weapons are becoming obsolete. Rather, defense companies may need to broaden their portfolios as governments balance established platforms with newer technologies.

Why Shares Have Come Under Pressure

The move lower reflects more than changing battlefield requirements. Investors are also contending with weaker-than-expected earnings, a stronger won, delayed export orders and high valuations that had priced in substantial growth.

Kim said money flowing into South Korean semiconductor stocks has added pressure to defense shares. He also pointed to delays in converting government spending pledges into approved budgets and firm orders—a reminder that announced defense ambitions do not always translate quickly into company revenue.

Recent results have reinforced investor caution. Hanwha Aerospace’s third-quarter operating profit fell more than 46% from a year earlier, with the company citing delivery-schedule adjustments and one-off costs. Its shares have declined more than 28% this year. Hyundai Rotem reported an operating-profit decline of more than 11.1%, while its stock has fallen almost 60%.

Korea Aerospace Industries has been more resilient. Its third-quarter sales rose about 52% and operating profit increased roughly 32%, limiting its share-price decline to just over 8% this year.

Export Orders Still Support the Long-Term Case

Despite the near-term setbacks, analysts see continued demand for South Korean systems. Hwang said companies are expanding cooperation with partners in Western Europe and the Middle East, including in air defense. Orders for K9 self-propelled howitzers, he added, point to the continued importance of deterrence and the constraints facing global suppliers.

Recent contracts offer evidence that export opportunities remain active. Hanwha Aerospace has secured K9 howitzer orders in Europe, including a contract valued at about 546 million euros, and a $922 million order from Norway for K239 Chunmoo multiple rocket-launcher systems. LIG D&A has also signed a $94 million agreement with Malaysia for its K-SAAM naval surface-to-air guided missile system, its first export deal for the platform.

Conventional weapons continue to matter because militaries need capabilities that can deter an attack and operate across a range of conditions. David Roche, a strategist at Quantum Strategy, told CNBC that major powers are placing greater emphasis on AI and drones as they absorb lessons from Ukraine. But, he noted, drones cannot capture and hold terrain: In mobile conflicts, infantry, tanks and armored vehicles remain essential.

Adaptation Will Determine What Comes Next

South Korean defense companies are investing in drones and unmanned systems, but building a successful product is only part of the challenge. Overseas customers typically want evidence that equipment has performed reliably in real-world operations, which can make it difficult for new systems to win exports quickly.

That creates a transition period for the sector. Established platforms may continue to generate demand, while newer technologies become increasingly important to future procurement. Kim said the sector remains attractive over the long term, with growth prospects still in the teens, even as investors reassess valuations and the timing of orders.

For South Korea’s defense industry, the central question is therefore not whether drones will replace tanks and artillery. It is whether companies can combine proven conventional systems with the technologies modern militaries increasingly require—and do so at a price and pace that keeps them competitive.